U.S. Economic News Summary of the Week ending December 23, 2022

Crypto Bubble Collapse Watch:

December 22 – Bloomberg (Ava Benny-Morrison, Allyson Versprille and David Voreacos): “FTX co-founder Sam Bankman-Fried landed in the US… to face a range of criminal charges just as two of his long-time associates said they were cooperating with prosecutors. The revelation that Caroline Ellison and Gary Wang had pleaded guilty to fraud and were working with federal officials probing the collapse of the crypto exchange is an ominous sign for Bankman-Fried. The 30-year-old is facing an eight-count indictment in New York.”

December 19 – Reuters (Tom Wilson, Angus Berwick and Elizabeth Howcroft): “The world's biggest crypto exchange, Binance, is battling to shore up confidence after a surge in customer withdrawals and a steep drop in the value of its digital token. The exchange said it dealt with net outflows of around $6 billion over 72 hours last week ‘without breaking stride’ because its finances are solid and ‘we take our responsibility as a custodian seriously.’ After the collapse of rival exchange FTX last month, Binance's founder Changpeng Zhao promised his company would ‘lead by example’ in embracing transparency… Yet a Reuters analysis of Binance's corporate filings shows that the core of the business – the giant Binance.com exchange that has processed trades worth over $22 trillion this year – remains mostly hidden from public view. Binance declines to say where Binance.com is based. It doesn't disclose basic financial information such as revenue, profit and cash reserves. The company has its own crypto coin, but doesn't reveal what role it plays on its balance sheet. It lends customers money against their crypto assets and lets them trade on margin, with borrowed funds. But it doesn't detail how big those bets are, how exposed Binance is to that risk, or the full extent of its reserves to finance withdrawals.”

December 22 – Wall Street Journal (Jean Eaglesham): “The Securities and Exchange Commission is stepping up scrutiny of the work that audit firms are doing for cryptocurrency companies, concerned that investors may be getting a false sense of reassurance from the firms’ reports… ‘We’re warning investors to be very wary of some of the claims that are being made by crypto companies,’ Paul Munter, the SEC’s acting chief accountant, said…”

December 19 – Reuters (Noor Zainab Hussain and Carolyn Cohn): “Insurers are denying or limiting coverage to clients with exposure to bankrupt crypto exchange FTX, leaving digital currency traders and exchanges uninsured for any losses from hacks, theft or lawsuits, several market participants said. Insurers were already reluctant to underwrite asset and directors and officers (D&O) protection policies for crypto companies because of scant market regulation and the volatile prices of Bitcoin and other cryptocurrencies. Now, the collapse of FTX last month has amplified concerns.”

December 20 – Bloomberg (Steven Church and Emily Nicolle): “A unit of digital asset firm Genesis won a spot on an official creditors committee in the FTX bankruptcy, a panel that may have a leading role in the biggest crypto insolvency case filed so far. Genesis previously said it had $175 million in exposure to FTX, which forced its parent Digital Currency Group to provide the firm with a $140 million capital infusion in November. Genesis is currently attempting to raise at least $1 billion in fresh funds to avoid filing for bankruptcy.”

December 21 – Reuters (Dietrich Knauth and Hannah Lang): “Core Scientific Inc, one of the biggest publicly traded cryptocurrency mining companies in the United States, said… it filed for Chapter 11 bankruptcy protection, the latest in a string of failures to hit the sector… Core Scientific attributed its bankruptcy to slumping bitcoin prices, rising energy costs for bitcoin mining and a $7 million unpaid debt from U.S. crypto lender Celsius Network, one of its biggest customers.”

Bursting Bubble and Mania Watch:

December 20 – Reuters (Chiara Elisei): “Stellar growth in private debt markets over the past decade looks set to face a reality check as a looming recession and higher interest rates squeeze companies' earnings and their ability to service borrowing costs. An era of ultra-easy cash from central banks lured investors into private credit, attracted by juicy returns in the high-single to low-double-digits. Regulation in the wake of the global financial crisis forced banks to dial back on lending to corporates -- particularly riskier ones. This opened the way for investment funds, such as Blackstone, to fill the gap and lend money to companies, which are often owned by private equity firms. But the private debt market -- the fastest-growing in the credit sector since the financial crisis -- is about to hit a speed bump as investor appetite for risky assets is tested by aggressive monetary tightening and recession. The private debt market has expanded to $1.4 trillion, up from $250 billion in 2010, according to… Preqin…”

December 19 – Financial Times (Tabby Kinder): “Tech start-ups that have traditionally relied on deep-pocketed Silicon Valley investors to fund ambitious growth plans are being forced into alternative financing deals to sustain their businesses and avoid drastic cuts in valuation. A sharp decline in venture capital dealmaking, alongside a closed market for initial public offerings, has resulted in a funding crunch for many private technology companies over the past year. Leading start-ups have been aggressively cutting costs, creating a wave of lay-offs across the tech sector. Still, a growing number of companies are running out of cash… New VC deals fell 42% in the first 11 months of this year to $286bn…, according to… Preqin. Silicon Valley law firm Cooley said the total value of late-stage VC deals it advised on had slumped almost 80% this year… Meanwhile, initial public offerings have dropped to their lowest level since 2009, cutting off a key source of fundraising for mature private companies and their backers. ‘Next year is when it all comes home to roost,’ said Ravi Viswanathan, founder of… New View Capital. ‘There will come a point where even companies with 18 to 24 months’ capital have to raise. There is going to be a lot of pain.’”

December 22 – MarketWatch (Joy Wiltermuth): “The $21 trillion commercial real-estate market faces a deluge of debt coming due, at much higher rates. An era of cheap debt that helped lift prices on hotels, office buildings and other U.S. commercial properties to dizzying new heights has ended. Borrowers thirsty for financing have watched mortgage rates roughly double in 2022 from the 3% lows… Higher financing costs already were a concern for 2023, with billions of dollars worth of older commercial mortgages coming due. Adding to the woes, top tech titans, including Meta Platforms (META), in recent weeks have retreated from splashy office leases.”

December 21 – Reuters (Akash Sriram and Jane Lanhee Lee): “Chipmaker Micron Technology Inc… forecast a much steeper-than-expected second-quarter loss and said it will lay off 10% of its workforce next year, citing a nagging glut in the semiconductor market. ‘Due to the significant supply demand mismatch entering calendar 2023, we expect that profitability will remain challenged throughout 2023,’ Micron chief executive Sanjay Mehrotra said. Micron had about 48,000 employees worldwide as of September 1.”

December 19 – Bloomberg (Jan-Henrik Förster, Priscila Azevedo Rocha and Abhinav Ramnarayan): “Private equity will have to get the check book out in the coming months if the industry wants to return to its record pace of deal making. That’s because banks stuck with billions of dollars of risky corporate loans, a hangover from deals underwritten in a lower-rate environment, are unlikely to back sizable new transactions until well into 2023… ‘It may be the second half of the year before banks return in force to leveraged buyouts,’ EQT AB Chief Executive Officer Christian Sinding said… Those lenders ‘haven’t been there to underwrite, not in any meaningful size, and still aren’t,’ he added later. That leaves buyout giants such as EQT, CVC Capital Partners and KKR & Co. with fewer funding options for acquisitions, a far cry from previous years… The easy money era had been a boon for the industry, helping increase assets under management by more than 250% in just over a decade.”

December 18 – Reuters (Rae Wee): “Private equity holdings are being sold at a record clip in an opaque secondary market, investors say, as asset managers cash out to cover losses elsewhere and rebalance portfolios. The wave of selling is the latest of several signs of stress in private markets and is another signal of investors starting to fall out of love with ‘alternative assets’ that only recently were drawing in cash… As they have become popular, they have expanded to encompass property and infrastructure projects. Yet since such funds are difficult to exit before maturity - usually at least three years - money managers needing to cash out use a secondary market that has lit up in the last few months. The discounts on offer suggest there is a hurry to get out… Investment firm Hamilton Lane says an unprecedented $224 billion in private equity stakes have been offered in the secondary market this year to mid-November. Not all have been sold, but analysis firm Preqin estimates the value of secondary transactions up until the third quarter was about $65 billion. This is not far off 2021's total of just over $70 billion and is far higher than previous years.”

December 22 – Reuters (Lananh Nguyen, Saeed Azhar and Lawrence White): “Bankers in New York and London are bracing for year-end bonuses that recruiters estimate are 30% to 50% lower, while some may receive none at all as dealmaking sputters and economic gloom sets takes hold. Financiers face disappointment when their compensation awards land in the first quarter, and thousands more of their colleagues could be laid off after hundreds were let go this year… Last year, the industry handed out the biggest awards since 2006 as the economy roared back from the pandemic. But this year, the pace of mergers and acquisitions and stock offerings dramatically slowed as debt financing markets collapsed and stock market volatility hurt valuations.”

December 21 – Financial Times (Harriet Agnew): “Cathie Wood’s Ark Investment Management has lost almost $50bn in assets from its stable of exchange traded funds since its 2021 peak, highlighting the scale of this year’s losses in speculative tech stocks. Total assets across Ark’s nine ETFs have slumped to $11.4bn from a peak of $60.3bn in February last year… ‘Ark Innovation’s results have been horrendous this year and very disappointing for investors,’ says Robby Greengold, a strategist at Morningstar, which in April downgraded the ETF from ‘neutral’ to ‘negative’.”

December 19 – Wall Street Journal (Veronica Dagher): “Many Americans dream the path to building wealth is like a trip around the Monopoly board, buying up properties that generate rental income. That can be true, but financial advisers warn the costs and aggravations of playing the landlord game are increasing. People thinking about becoming landlords might have a tougher time turning a profit after a year marked by higher home prices and mortgage rates. Rents are up too, but because of inflation so are the costs of repairs and routine home maintenance. The benefits to owning a rental property—passive income and tax breaks—have been touted frequently on YouTube and TikTok in recent years. However, anyone planning to buy a rental property right now should factor in the likelihood of higher costs and unexpected expenses.”

December 19 – Bloomberg (Sagarika Jaisinghani): “US equities are set for their worst year since the global financial crisis, and, according to Morgan Stanley strategist Michael Wilson, corporate profits are about to meet the same fate. A looming earnings recession ‘by itself could be similar to what transpired in 2008/2009,’ said Wilson. That could spark a new stock-market low that’s ‘much worse than what most investors are expecting,’ he wrote... ‘Our advice — don’t assume the market is pricing this kind of outcome until it actually happens,’ Wilson said.”

Inflation Watch:

December 23 – Associated Press (Paul Wiseman): “A measure of inflation closely watched by the Federal Reserve slowed last month… Friday’s… showed that prices rose 5.5% in November from a year earlier, down from a revised 6.1% increase in October and the smallest gain since October 2021. Excluding volatile food and energy prices, so-called core inflation was up 4.7% over the previous year. That was also the smallest increase since October 2021. On a month-to-month basis, prices rose 0.1% from October to November after rising 0.4% the previous month. Core prices rose 0.2%.”

U.S. Bubble Watch:

December 21 – CNBC (Diana Olick): “Sales of existing homes fell 7.7% in November compared with October, according to the National Association of Realtors. The seasonally adjusted annualized pace was 4.09 million units… Sales were down 35.4% year over year, marking the tenth straight month of declines. That was the weakest pace since November 2010, with the exception of May 2020… At the end of November there were 1.14 million homes for sale, which is an increase of 2.7% from November of last year, but at the current sales pace it represents a still-low 3.3 month supply… Sales decreased in all regions but fell hardest in the West, where prices are the highest, down nearly 46% from a year ago. Homes sat on the market longer in November, an average 24 days, up from 21 days in October and 18 days in November 2021. Despite the slower market, 61% of homes went under contract in less than a month.”

December 23 – Bloomberg (Reade Pickert): “Sales of new US homes unexpectedly rose in November, suggesting some stabilization in demand as mortgage rates eased late in the month... Purchases of new single-family homes increased 5.8% to an annualized 640,000 pace last month after rising in October… The increase in sales last month was concentrated in the West and Midwest. The report… showed the median sales price of a new home was up 9.5% from a year earlier to $471,200. There were 461,000 new homes for sale as of the end of last month, though the grand majority remain under construction or not yet started.”

December 19 – CNBC (Diana Olick): “Homebuilders were less confident about their business in December, but they are starting to see potential green shoots. Builder sentiment in the single-family housing market dropped 2 points to 31 in December on the National Association of Home Builders/Wells Fargo Housing Market Index. Anything below 50 is considered negative. This is the 12th straight month of declines and the lowest reading since mid-2012, with the exception of a very brief drop at the start of the Covid pandemic.”

December 20 – Bloomberg (Reade Pickert): “New US home construction continued to decline in November and permits plunged as high borrowing costs paired with widespread inflation eroded housing affordability and demand. Residential starts decreased 0.5% last month to a 1.43 million annualized rate… Single-family homebuilding dropped to an annualized 828,000 rate, the lowest since May 2020. Applications to build… decreased 11.2% to an annualized 1.34 million units. Permits for construction of one-family homes fell 7.1% to the weakest pace since 2020… Meanwhile, the number of homes completed jumped nearly 11% to an annualized 1.49 million, the highest since August 2007 and a sign builders are making greater progress on backlogs amid a demand pullback.”

December 21 – Reuters (Lucia Mutikani): “The U.S. current account deficit narrowed sharply in the third quarter as exports jumped to a record high… The… current account deficit, which measures the flow of goods, services and investments into and out of the country, contracted 9.1% to $217.1 billion last quarter. That was the smallest gap since the second quarter of 2021. The current account gap represented 3.4% of gross domestic product, down from 3.8% in the second quarter. That was the smallest share in two years.”

December 19 – Axios (Emily Peck): “There were 374 worker strikes started in 2022 — a 39% increase over 2021, according to a database run by Cornell. Why it matters: Fueled partly by anger over working conditions in the pandemic and spurred on by other labor wins, all sorts of workers — warehouse employees, teachers, nurses, graduate students, journalists — walked off the job. Many others voted to unionize — including at more than 260 Starbucks stores in the past year — demanding better pay and working conditions. Over the weekend, the University of California reached a tentative agreement with around 36,000 employees that would end the year's biggest strike, and provide some workers with wage increases of as much as 55%.”

December 21 – CNBC (Diana Olick): “Mortgage interest rates dropped again last week, and while that did little to bolster demand from homebuyers, it did send homeowners looking for savings on their monthly payments… Mortgage applications to purchase a home decreased 0.1% for the week and were 36% lower than the same week one year ago.”

December 21 – Wall Street Journal (Jesse Newman and Jacob Bunge): “High prices for crops and livestock are fueling a boom in the U.S. Farm Belt, making farmers, ranchers and agricultural companies rare winners as the broader American economy softens. U.S. net farm income is expected to surge to $160.5 billion this year, boosted by increased prices for farm goods… If realized, farm income would reach the highest level since 1973 in inflation-adjusted dollars, marking a sharp recovery from an agricultural recession that battered farmers and their suppliers during the past decade.”

December 20 – Reuters (December 22 – Financial Times (John Plender): “U.S. companies borrowed 9% more to finance their equipment investments in November from a year earlier, industry body Equipment Leasing and Finance Association (ELFA) said… The companies signed up for $8.6 billion in new loans, leases and lines of credit last month… Borrowings were up nearly 6% from January. ‘Rising interest rates seem to have little or no effect on origination volume in November,’ ELFA CEO Ralph Petta said…”

Fixed-Income Watch:

December 22 – Bloomberg (Carmen Arroyo): “Debt markets are increasingly sorting US leveraged loans into two categories: money good, and distressed. A growing proportion of prices in the market are either very high, or very low. About 5% of the market is trading under 80 cents on the dollar, a share that has more than doubled since June, according to a JPMorgan... With more loan prices reaching extremes, companies that run into any sort of difficulty can see their loans plunge quickly. That can translate to surging borrowing costs, boosting the chance of corporations defaulting. ‘This puts the worst companies at risk, as they’ll have a harder time refinancing,’ said Roberta Goss, senior managing director and head of the bank loan and collateralized loan obligations platform at Pretium Partners LLC…”

December 20 – Reuters (Shankar Ramakrishnan and David French): “Private U.S. oil and gas companies are increasingly turning to a niche financing structure that securitizes their production, providing a funding avenue for producers and owners as traditional sources become more expensive or simply dry up. Known as PDP asset-backed securitizations (ABS), this product takes revenue generated by companies' proved, developing and producing (PDP) oil and gas operations and uses that cash flow as collateral for a bond that is sold to investors. With banks pressured by stakeholders to restrict loans to the oil and gas sector over its environmental impact, private energy producers - more reliant on bank lines than listed peers - are able to maintain access to outside finance through this niche product.”

Social Instability Watch:

December 22 – Wall Street Journal (Julie Wernau and Jon Kamp): “Life expectancy in the U.S. fell again last year to the lowest level since 1996…, after Covid-19 and opioid overdoses drove up the number of deaths. Covid-19 was the third-leading cause of death for a second consecutive year in 2021… Overdose deaths have risen fivefold over the past two decades. The death rate for the U.S. population increased by 5%, cutting life expectancy at birth to 76.4 years in 2021 from 77 years in 2020… Before the pandemic, in 2019, life expectancy at birth in the U.S. was 78.8 years. The decline in 2020 was the largest since World War II.”